Subject: Vicious circle in tax returns? Expert: taxman at centa.com Date: Monday June 26, 2006 Time: 09:16 AM -0700 QUESTION: I am a US citizen now living and working for a Canadian firm in Toronto, with some additional income from US investments. I know I must file both a US return and a Canadian return, but there seems to be a "vicious circle". Each country wants me to report all worldwide income and then get a tax credit for taxes paid to the other country. But I can't compute the US tax until I know the Canadian tax and vice versa. There must be a way out of this, yes? --------------------------------------------- david ingram replies: Your dilemma is what keeps us in business. Compute the Canadian tax first because that is where you live. Figure out the Canadian Tax per item - i.e. the tax you paid on interest, the tax you paid on salary, the tax you paid on rents, etc BEFORE you claim any US foreign tax credits. This is the pure tax and is the way that the US automatically shows the figures because the foreign tax credits come off very visually after the tax is calculated. Then figure out the US tax that you owe. Note that the US tax is limited to 10% on interest and 15% on dividends and royalties and pensions, etc. If your calculated tax exceeds these numbers you claim the excess back on US form 1116 as a foreign tax credit because of income "resourced by treaty". Now you can claim the foreign tax credit on the US 1040 by using form 1116 top claim a foreign tax credit for taxes paid to Canada for wages, etc. Form 1116 has a nice breakdown for rents, interest, dividends and other. I have designed my own form to do the same thing for Canada and the US together. (Took me over three weeks of programming to make it work and I still end up with handwritten additions to half of the clients because their situation exceed the limits of my 4GL form. You now figure out the FTC for Canada for each item individually - i.e rent, interest, dividends, royalties, alimony, pensions, etc. And again, Canada will only allow you a 15% credit on Pensions (Art XVIII), 10% on interest (Art XI), 15% on dividends (Art X) and so on. You put the tax paid to the US on line 431 and the net income from the US on line 433 of Canadian schedule 1. If it is not all used up, you can claim the excess on the equivalent lines of the Provincial 428 by filling in Canadian Provincial form T2036. W A R N I N G After this is all done, you may find out that you have claimed a foreign tax credit in Canada for more than you actually paid the US or vice versa. If so, just reduce the amounts accordingly. And, last but not least, if you give up, you know where to find me. ======================================= Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). This is not intended to be definitive but in general I am quoting $800 to $2,000 for a dual country tax return. $800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year. $1,000 would be the same with one rental $1,200 would be the same with one business no rental $1,200 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes. $1,500 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits no move in or out $2,000 would be all of the above and you moved in and out of the country. This is just a guideline for US / Canadian returns We will still prepare Canadian only (lives in Canada, no US connection period) with a three or four slips and no capital gains, etc. for $125.00 up. With a Rental for $300 A Business for $300 - Rental and business likely $400 And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return. Moving in or out of the country or part year earnings in the US will ALWAYS be $400 and up. TDF 90-22.1 forms are $25 for the first and $10.00 each after that when part of a tax return. 8891 forms are generally $50.00 to $100.00 each. 18 RRSPs would be $900.00 - (maybe amalgamate a couple) Capital gains *sales) are likely $50.00 for the first and $20.00 each after that. -- David Ingram's US / Canada Services US / Canada / Mexico tax, Immigration and working Visa Specialists US / Canada Real Estate Specialists My Home office is at: 4466 Prospect Road North Vancouver, BC, CANADA, V7N 3L7 Cell (604) 657-8451 - (604) 980-0321 Fax (604) 980-0325 Calls welcomed from 10 AM to 10 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of those hours as this is a home office) email to taxman at centa.com www.centa.com www.david-ingram.com Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included." Be ALERT, the world needs more "lerts" David Ingram gives expert income tax & immigration help to non-resident Americans & Canadians from New York to California to Saudi Arabia to Mexico to China or Chile - Cross border, dual citizen - out of country investments are all handled with competence & authority. 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